Global climate fund for a more efficient CO2 reduction

_ Dr. Ulrich van Suntum, honorary professor, University of Münster, former Secretary-General, German Expert Council for the Assessment of Overall Economic Development (SVR).  10. September 2021.

Global climate policy is not making good progress. While Germany and the EU are trying to become climate-neutral with increasingly rigid requirements, the largest emission countries such as China, India and Russia are even increasing their emissions every year. China’s additional CO2 emissions alone between 2017 and 2018, at 856 million tons of CO2, were more than are still being emitted in Germany as a whole (namely 753 million tons). Therefore, one should not be surprised if, despite climate agreements and massive efforts, especially by western industrialized countries, global emissions have continued to rise every year, by 2387 tonnes or a good one percent between 2017 and 2018 alone.

In addition, reduction measures in highly developed industrialized countries are much more expensive than in emerging countries. The CO2 price for the emission certificates newly introduced in China is only 7 euros per tonne saved,[1] while in the EU and Great Britain it is currently around ten times as much. The costs for legally enforced or appropriately subsidized CO2 reductions, for example in the European automotive industry or in photovoltaics, are once again about a factor of 10 higher. In other words, the same money could save hundreds of times the amount of CO2 if the industrialized countries used it for reduction measures in the emerging countries instead of for completely inefficient targets at home.

To this end, the creation of a global climate fund is proposed here. Any country interested in efficient climate protection can contribute to this on a voluntary basis. The public pressure is likely to cause this to happen, at least in the democratically constituted countries. Nonsensical goals such as national climate neutrality as well as outrageously expensive and liberty-damaging regulations such as the ban on internal combustion engines could and should be dropped, which would certainly increase public acceptance of the fund. The deposits could be made in the form of a basket of the major world currencies, so as not to favor any country. The construction of special drawing rights, which have been used by the International Monetary Fund for many years, lends itself to this.

Those countries that are prepared to offer the largest contribution to the climate would receive money from the fund. However, no individual projects should be funded in order to avoid problems such as deadweight effects and possible additional emissions elsewhere. Instead, the development of a country’s total emissions compared to a base year (around 2018) should be used as the benchmark. How the respective country achieves the agreed goals could and should then be completely left to itself. That would be a free and highly efficient way of finding the most cost-effective way in competition both between countries and within each country.

However, awards should not only be given to absolute emissions reductions compared to the base year. Otherwise rapidly growing countries like China would be at a disadvantage or could not even be integrated with the system, although this is where the greatest and most cost-effective reduction potentials lie. Instead, climate efficiency, i.e., the development of greenhouse gas emissions per unit of national GDP, should be the benchmark. Growing economies could then also receive money from the fund, even if they emit even more CO2 in absolute terms than in the previous year. Because it is precisely the flattening (and later reversal) of the emissions path in countries like China, which alone is responsible for 30 percent of global CO2 emissions, that forms the key to actually effective climate protection.

Tab. 1. Climate efficiency by the largest CO2 emitting countries

Source: Compiled by the author based on (Crippa et al. 2019) [2] and (IMF 2019)[3].

The countries with the largest emissions in absolute terms should receive even more money for improving climate efficiency than other countries in which a lot has already been achieved. For example, CO2 emissions per USD 1,000 GDP in China are currently around 0.764 tons, while in the USA (the world’s second largest emitter), it is only 0.246 tons. But China also emits more than twice the amount of CO2 compared to the US in absolute terms. In China, therefore, an improvement in climate efficiency of 0.9 percent is sufficient to save 100 million tonnes of CO2 (assuming constant GDP), while energy efficiency in the USA would have to be improved by 1.9 percent for the same purpose (see Tab. 1.). A CO2 reduction by the same amount should trigger the same premium everywhere, regardless of where it occurs, because the climate doesn’t care. In our example, this means that the reward for every 1% improvement in climate efficiency should be around twice as high for China as for the USA, in order to distribute the fund resources as efficiently as possible among the countries.

Ideally, the fund distributions would be based on the net emissions of climate-relevant gases. The creation of new CO2 sinks, for example by planting forests or avoiding deforestation and slash and burn could then also be taken into account. However, this would require a sufficiently good and reliable database. On the other hand, it would not be a problem if, for example, a country collects premiums for CO2 reductions one year and no longer persists or reverses them in the following years. Because the CO2 remains accumulated in the atmosphere, so that even a temporary reduction in emissions would have a permanent positive effect.

If the funds run out before the desired goals are achieved, the donor countries would have to provide additional funding. Every country seriously interested in climate protection has, by definition, an incentive to participate voluntarily, and the free rider problem can also be solved through clever negotiations (van Suntum 2021).[4],[5] The biggest problem, however, is likely to be that politicians usually prefer to take effective advertising measures in their own country than to deposit funds into an anonymous fund with relatively little attention value, even if this would be a hundred times as efficient in implementing the actual global climate target.

Notes

[1] Zinke O. (2021). China startet CO2-Emissionshandel – zu Spottpreisen. Agrarheute. URL: https://www.agrarheute.com/management/finanzen/china-startet-co2-emissionshandel-spottpreisen-583463

[2] Crippa, M., Oreggioni, G., Guizzardi, D., Muntean, M., Schaaf, E., Lo Vullo, E., Solazzo, E., Monforti-Ferrario, F., Olivier, J.G.J., Vignati, E., Fossil CO2 and GHG emissions of all world countries – 2019 Report, EUR 29849 EN, Publications Office of the European Union, Luxembourg, ISBN 978-92-76-11100-9, doi:10.2760/687800, JRC117610, September 2019.

[3] IMF (2019). World Economic Outlook Database October 2019. URL: https://www.imf.org/en/Publications/WEO/weo-database/2019/October

[4] van Suntum, Ulrich (2021): The Global Protection Organisation (GPO) – A Proposal to Improve the Handling of Global Challenges. MPRA-Paper 108984

[5] van Suntum U. (2021). Using the Coase theorem to solve global challenges: proposal for a Global Protection Organisation (GPO). MIWI Institute. URL: https://miwi-institut.de/archives/1301